RBS split raised amid banks rethink

Radical plans to split Royal Bank of Scotland into a 'good' bank and a 'bad' bank must be looked at immediately

Radical plans to split Royal Bank of Scotland (RBS) into a "good" bank and a "bad" bank must be looked at immediately as part of an urgent rethink of Government plans for privatisation, according to an influential Parliamentary commission.

In its keenly awaited final report, the Commission on Banking Standards stopped short of recommending a full break-up of RBS, but said the option must be considered as it warned current plans to return RBS to the private sector risked being "insufficient".

The Government also came under heavy fire for "political interference" in RBS and fellow state-backed lender Lloyds Banking Group, with the report calling for the body in charge of managing the taxpayer stakes to be scrapped. Excessive pay practices and rewards for failure must also be stamped out, with regulators given the power to defer bonuses for 10 years, according to the report.

The recommendations come as part of wide-ranging proposals to shake up the banking sector in the wake of recent scandals, including jail terms for unscrupulous bankers and a new professional code of conduct. Entitled "Changing banking for good", the near-600-page report comes ahead of Chancellor George Osborne's annual Mansion House speech, when he will address the issue of how to reform Britain's banks. Mr Osborne has confirmed he will outline the next steps for the state-backed banks following the report's recommendations.

RBS bosses recently said the bank would be fit for a return to the private sector within a year, but there are concerns the move will be politically motivated ahead of the 2015 general election and may see the taxpayer make losses on its 81% stake. Shares are still significantly below the 500p break-even price for the Government on its £45 billion bail out - currently at around 323p.

The commission said in its report that the current strategy for returning RBS to the private sector "has been allowed to run for five years", but added "it is time to look at this afresh".

A Treasury spokesman said it was a "very impressive piece of work", adding: "There are many recommendations in it which will help the Government's plan to create a stronger and safer banking system. This comprehensive report, produced in less than a year, vindicates the judgment that a parliamentary commission would be swifter and more appropriate than a lengthy public inquiry that others proposed at the time."

He said the Government will support legislation where it is needed, and will amend the Banking Bill currently before Parliament to ensure changes are quickly enacted. He added: "The Government publicly welcomes the Commission's recommendations on increased personal responsibility, especially at a senior level, increased professional judgment by regulators, and better functioning markets. We will now get on with a swift response and will report before the summer recess."

Shadow chancellor Ed Balls said: "After the global financial crisis and the banking scandals that followed we need cultural change and radical reform to protect taxpayers, rebuild public confidence in the banks and ensure that in future they work to support the wider economy. This report sets out a radical blueprint for change on professional standards, regulation, competition, pay and accountability. It is vital that the Government and the banks rise to the challenge.

"The Chancellor should now get on and implement this report in the Financial Services Bill currently going through Parliament. And he must rethink his refusal to implement some of the recommendations of the Commission's previous reports, including on the need for a backstop power for full separation of the banks. This is no time to duck radical reform. On the future of RBS and Lloyds, it is vital that Government decisions are driven by the best interests of the British taxpayer and the wider economy, not a political timetable. On RBS in particular, David Cameron and George Osborne must resist the temptation for a loss-making firesale at the current share price which would add billions to the national debt. As Stephen Hester said last week RBS is capable of being worth more than what the taxpayer paid."

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